The college will pay $30,000 to 21 complainants each, with $250,000 for their lawyers, according to an agreement filed in a Sacramento court.
University police were filmed using the pepper spray on peaceful protesters at the Davis campus in November 2011.
The viral video became a rallying cry for the Occupy Wall Street movement.
There were calls for the resignation of Chancellor Linda Katehi and a task force’s report in April blamed the incident on poor communication and planning throughout the university’s entire chain of command.
The settlement also asks the university to set aside $100,000 for others who can prove they were arrested or sprayed during the 18 November episode. The proposal must be approved by a judge.